"The trader was in deep trouble. A millennial who had only recently been allowed to set foot on a Wall Street floor, he made bad bets, and in a panic to recoup his losses, he’d blown through risk limits, losing $4.9 million in a single afternoon.

"It wasn’t a career-ending day. The trader was taking part in a simulation run by Andrew Lo, an MIT finance professor. The goal: find out if top performers can be identified based on how they respond to market volatility..."

During a half-hour interval on May 6, 2010, stock prices for some of the largest companies in the world dropped precipitously, some to just pennies a share. Then, just as suddenly and inexplicably, shares recovered to their pre-crash prices. This unprecedented event, burned into the memories of investors and regulators alike, is now known as the Flash Crash. Since that day, financial markets have seen flash crashes in US Treasury securities, foreign currencies, and exchange-traded funds (ETFs). Other puzzling, system-wide glitches are becoming more frequent as well. Without a doubt, our financial systems are complex and often unpredictable, and when they swing out of control they remind us how much we still have to learn about how they work and how inadequate our traditional methods of controlling them are.

"Not that long ago, it looked like it was game over for the field of study that produced the mortgage backed security, the credit default swap and all manner of other exotic derivatives that exploded so spectacularly in the financial crisis of 2008.

"Now, financial engineering theory is being touted by several academics as the key to curing cancer faster, reducing the impact of climate change and imposing better risk discipline on the same banks that were once almost felled by the discipline’s creations..."

"Does evolutionary biology offer better insight into today’s markets than the immutable laws of physics? Andrew Lo, director of the Laboratory for Financial Engineering at the Massachusetts Institute of Technology, thinks so..."

Andrew Lo, Professor of Finance at the MIT Sloan School of Management and the director of MIT's Laboratory for Financial Engineering, discusses his recent paper The Gordon Gekko Effect, corporate culture, and why biology is an increasingly relevant framework for understanding the financial markets.

Culture matters in economic life, and nowhere does it matter as much as in the world of finance. Although many economists acknowledge the importance of culture in shaping the world of finance, and in determining financial outcomes, very few have actually researched this issue carefully. A recent research paper by Andrew Lo of the MIT Sloan School of Management fills this gap.

Studies show that emotions are inevitable, and maybe even necessary, when making decisions.

When trying to understand how the market is working, we should think not only of bulls and bears, but also of dodos. Our aversion to risk comes from the deep biological imperatives that have allowed humans to avoid extinction. Any theory of markets must take account of this.

That, at least, is the radical prognosis of Andrew Lo, of the MIT Sloan school of business, who has for years worked on an ambitious project to apply biology to finance. His latest paper, published with several colleagues, provides mathematical equations to show how risk-averse behaviour is necessary for survival. That means that investors in markets will take risk-averse actions rather than the purely rational decisions that economists have classically assumed.

Natixis and MIT team up to build individual benchmarks based on investor behavior. Dr. Andrew Lo, Charles E. and Susan T. Harris Professor at the MIT Sloan School of Management and director of the Laboratory for Financial Engineering (LFE), will lead the project, which will be conducted using Natixis data (the firm has collected several years worth of data that track the behavior of individual investors, financial advisors and institutional investors, and that is based on responses to more than 500 survey questions by more than 30,000 participants).  The main goal of the project is to create personal, individual benchmarks that take into account individual behaviors in order to improve investor participation and performance.

Lecture 1: Evolutionary Foundations of Behavior and Rationality

Lecture 2: Adaptive Markets in Theory and Practice

Lecture 3: Hedge Funds - The Galapagos Islands of Finance

Andrew Lo, an economist and finance professor at the Massachusetts Institute of Technology's Sloan School of Management, discusses how behavioral issues can influence investors. Lo talks with Bloomberg's Pimm Fox and Vonnie Quinn on Bloomberg Radio's "Taking Stock."

A professor of finance at MIT, Andrew W. Lo is an editor of the RSF volume Rethinking the Financial Crisis. The volume addresses important questions about the complex workings of American finance and shows how the study of economics needs to change to deepen our understanding of the financial sector.

MIT's Andrew Lo argues evolutionary biology may be the key to understanding how humans react to financial choices, and how they may behave in the future. He joined Kara Miller to talk about his research.

MIT Sloan professor Andrew Lo and Vinny Catalano, president of Blue Marble Research are interviewed on Bloomberg Radio about how to put behavioral economics to work to make more money.

Andrew Lo, a professor at MIT Sloan School of Management and investigator at MIT’s Computer Science and Artificial Intelligence Lab, has been seeking to find out why so many bad decisions were made on Wall Street leading up to the financial crisis. Lo, along with Thomas J. Brennan, a law professor at Northwestern, says the evolution of the human mind may explain a blind faith that housing values will rise and that mortgage securities and stocks would not fall in value as well as the opposite view.